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Soaring inflation to trigger a recession

A rise in CPI inflation from the 40-year high of 9.1% in May to a peak of 12% or higher in October will reduce real incomes by enough to mean that a recession now seems inevitable. Our forecast that real household disposable income will fall by more than 2% in both 2022 and 2023 would be the biggest decline on record and will surely prompt real consumer spending to fall. With the global factors that initially boosted inflation now being replaced by more persistent domestic inflationary forces, a recession is unlikely to reduce inflation to the 2% target on its own. As such, we think interest rates will be raised in a recession for the first time since 1975. Our forecast that the Bank of England will increase rates from 1.25% now to 3.00% next year envisages rates peaking much higher than the consensus forecast.

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